The Art of Lease Negotiation For Healthcare Providers

Healthcare providers are the most coveted tenant type. What follows is not legal advice. It is a series of short think pieces for doctors, dentists and healthcare entrepreneurs looking to build a practice in New South Wales. Peter posts daily content for healthcare entrepreneurs on his LinkedIn page.

Low voltage

16 July 2024

Sometimes, the failure to correct the imbalance of risk in a lease is self-inflicted.

A tenant under pressure to get the keys may be prepared to overlook unfair provisions in the lease because put simply, he will not get the keys until he signs the lease.

The key here is to reduce the pressure.

The best leasing decisions are made in low-voltage environments. Assembling and priming his lease team early, a tenant is less likely to fumble timing. A simple example, would it help to know the readiness and capacity of the builder to start the fit out before agreeing to a handover date with the landlord ?

Reliable wins

10 July 2024

Generally speaking, landlords want one thing – a reliable, passive income that comes from secure and uninterrupted cash flow from a quality tenant. A quality tenant is reliable, capable of delivering a consistent and increasing rental income year in year out.

Landlords know not all tenants are as valuable as others. Some are unreliable. So they look for tenants with sound, long term business models who would be reluctant to leave. They know tenants who spend hundreds of thousands of dollars (if not millions) on specialised fit outs and generate location specific goodwill are unlikely to be enticed to move by cheaper rents up the road.

Medical and dental practices will typically outlast all other tenancy types. In the eyes of a landlord they are reliable and therefore more valuable.

You are the prize. Landlords must compete for the privilege to have you as a tenant.

Keep looking

1 July 2024

Having found a good location – of which there are plenty – many tenants stop looking putting all their eggs in that one basket.

Tenants would do well to cultivate interest in alternative sites simultaneously. Not only does that help the tenant zoom out and provide perspective on what other landlords in the same market are prepared to offer, but it delivers leverage. The power of choice. The quiet confidence to make bold, positive decisions knowing that if one deal does not work out, there are others equally attractive to choose from.

Leverage and positioning are an inside job. A tenant can choose to explore multiple sites – or not. It is a choice.

Position v. “positioning”

28 June 2024

Healthcare tenancies are coveted by landlords for many reasons, the most basic being the promise of a stable, long term rental income.

Better positioning not only differentiates dentists from the mass of other potential tenants, it strengthens their prospects in the negotiations.

In negotiations, a “position” is a number or outcome around which one party rallies without much regard to the genuine interests of the other party, or their own for that matter. In its extreme, a position ends up at “take it, or leave it”.

On the other hand, “positioning” is the process whereby a tenant signals its value before negotiations start and adopts the role as the pursued (the prize to be won), not the pursuer.

Would the landlord like a dentist in the building ? No, move on. Yes, why does the landlord think a dentist would do well here ?

It is subtle.

Sinking feeling

21 June 2024

A sunk cost is a cost that has already been incurred and cannot be recovered.

There are many potential sunk costs for tenants when exploring a new site. When faced with a business decision, the sunk cost bias is the tendency to justify further expenditure instead of cutting one’s losses – “we have come this far, we might as well press on”. It is akin to continuing to climb the wrong mountain.

Blinkered by sunk cost bias, progress can be preferred to prudence. For this reason, tenants would do well to limit sunk costs and not to over invest in any particular deal.

Choices

17 June 2024

A new tenant has the power of choice.

A new tenant can choose to plan, assemble a team of expert advisors, seek advice early, give shape to its optimal and minimal viable lease models, search for opportunity where the offering is more likely to be compatible with its business case and negotiate where they have a natural advantage – or not.

Lease team

12 June 2024

No tenant is an island. A lease team is a group of preferred professional suppliers for finance, compliance, accounting, design, build and other inputs on the critical path to building a new practice.

Assembling preferred team members before searching for premises is strong move. A tenant who has completed the sales-cycle with its team can move quickly when presented with opportunity.

Without a team behind them, a tenant is more likely to fumble decisions including those that increase the burn rate.

When ?

11 June 2024

Few tenants are genuinely ready. Landlords know this.

Waiting for the tenant to get his ducks-in-a-row is not good for business. Instead, tenants are often pressed to agree to an arbitrary start date, usually reckoned from today.

Six week fit out period ? Great. The 6 weeks starts from today. Rent free period ? Sure, let’s start the clock on that too.

Agreeing to a start date that does not cover-off basic lead times is a tell – a big clue the tenant is a rookie.

Why should the tenant de-risk delays for the landlord ? Delays in preparing and finalizing documents, old tenants not vacating on time, drags on getting consents and approvals are just a few possible time-sinks. Burning time is burning money.

Burning

10 June 2024

The “burn rate” is the speed at which a company consumes its cash. The same applies to a tenant spending money fitting out its premises.

A slow burn rate is good.

The burn rate applies to non-cash resources such as rent free periods. Rent free periods are burned by delay.

Banks, councils, licensing authorities, owners corporations and builders all play by their own rules. Managing delays requires an understanding of the critical path – who must do what by when to keep the build on time and on track.  

By understanding the critical path, the tenant can minimize his exposure to foreseeable delays.

Point of view

6 June 2024

The think pieces to date and those that will follow are an expression of a novel point of view developed over years of observation.

By and large, leases are the product of system designed to rob the tenant of control. The leasing process in inherently unfair. Get used to it.

The art of lease negotiation is a narrow topic, here it is viewed through a very specific lens – the belief that healthcare tenants need a north star to guide them. The trajectory is set by the tenant but if an offer does not significantly overlap with that trajectory then flick.

Get uncomfortable

5 June 2024

The easy thing to do is to politely respond to the tenancy application form, to follow the path the landlord has laid out rather than push back and challenge the process.

Conforming to this process robs the tenant.

Shopping centres require tenants sign the same lease to aid in the management and administration of the centre. In effect, the process commoditizes tenants stripping back their character and their offering into one homogenous tenancy “mix”.

In this world, a dentist and GP have the same goals and sign the same lease as a kebab shop. Healthcare practices are not fodder. They will do well to understand their intrinsic value and why they are the coveted tenant type.

Comfortable negotiation is not the aim. Derail the process.

Strong decisions made early

4 June 2024

Instead of looking for the best deal, tenants should become better at disqualifying the bad ones. For a prospective tenant, a bad deal is one that does not match its criteria for a minimum viable lease.

Armed with a MVL, prospective tenants have the upper hand provided of course, they use it. A prospective tenant should expect to walk away from any number of incompatible deals. It is only by saying no, can a tenant then meaningfully say yes to a good deal. Do not be afraid of starting and restarting the search. Disqualifying bad deals is part of the process.

Poker face

3 June 2024

At each end of the spectrum, tenants may either be negotiating with an idealist landlord or a poker playing one – but it’s usually a mix of both.

Idealists view negotiation as a serious exercise with serious consequences expecting the other side to be motivated by what is universally fair and just, honest and transparent. By default they aim for a WIN : WIN outcome. Idealist landlords – if they do exist, are rare.

Poker players do not trade on trust or fairness. What is right or wrong depends on the situation. These sorts of landlords see negotiation as a game. Whilst they do not cheat, they see no problems in changing the rules. In the extreme, think used-car-salesman.

Lease negotiations can be uncomfortable. Over-reacting to salesmanship on the part of a leasing agent is a “tell”. A behavioural cue that inadvertently reveals information about the strength of a person’s hand, in this case a tenant’s position.

Not returning calls, short dismissive emails, silence and unexplained delays are all part of the game designed to elicit such a tell.

Zoom out

30 May 2024

Often the only thing that can give a would-be tenant reliable perspective is distance. Distance allows you to zoom out and see the bigger picture. In leasing, not having regard to the bigger picture is foolhardy.  

The big picture will ultimately determine whether the decision was a good idea. Without it, a tenant may well climb the wrong mountain – getting a great deal on a dud location or vice versa. Perspective comes from cold detachment. Cold detachment is power.

However glib this may sound, the landlord leasing the site to another provider is not the end of the world. Zoom out. Surround yourself with big-picture professionals. Better to climb down off the wrong mountain than to keep going and reach its summit.

Zoom out.

The sale is the sample

23 May 2024

New tenants dealing with a heavy handed leasing agent will do well to remember if the sale is bad, the deal will be bad. Of course there are some rare exceptions but put simply, good deals do not happen in a bad way.

If a tree produces lemons, it is a lemon tree. If dealing with a leasing agent produces stress, anxiety and uncertainty, the tree will give more of the same during the negotiation stages. An antidote to the usual sales venom is the confidence that comes from knowing the minimum viable lease. Without an MVL tenants are more susceptible to high pressure sales tactics.

Building blocks

21 May 2024

Competition for healthcare fitout work is fierce. Evaluating competing proposals from builders is no easy task. To compare apples with apples tenants need to give appropriate weighting to different parts of each proposal, not just the price.

Without diving into the world of construction contracts, prices can change. To avoid surprises, tenants would do well to spark a conversation with respectable builders before starting their search for premises.

To their credit, the best builders invest time in nurturing relationships and guiding clients along the path. These builders align their processes with the success of the tenant, not simply winning the job. Happy for a client to not compromise its business case, their language and behaviour are tenant-centric.

One compelling factor is the strength and reassurance they can provide a tenant when preparing for lease discussions. Without their builder a tenant cannot complete its optimal lease modelling and put plainly, would be negotiating blind.

Optimal lease

17 May 2024

“Optimizing” a lease means to define the highest and best form lease for a tenant’s business case.

The process takes place behind closed doors, not involving the landlord. Calmly and methodically, lease terms and conditions are dissected and their future operation and potential impact on the tenant explained so as to give shape to the best outcome in each scenario.

For balance, the process requires input from other professionals on the lease team to identify the best-case-scenario for build, finance, compliance, valuation, insurance, asset protection (and so on).

On its face, the benefit of an optimal lease is that it gives the tenant a north star, providing context and a scoreboard for negotiations with the landlord.

Looking deeper, the real advantages include the tenant engaging and priming its lease team early and being able to understand and define its minimum viable lease. For a tenant, not knowing the minimum viable lease is self-sabotage.

Minimum viable lease

16 May 2024

A minimum viable lease (MVL) is the most basic version of a lease needed to satisfy a tenant’s business case. Unlike an optimal lease which ticks all of the boxes, the MVL secures only those elements that are essential.

When formulating an MVL, there are some realities of negotiation to keep in mind. One, a landlord is unlikely to agree to everything required for an optimal lease. Two, each side puts different value on different parts of a deal.

Negotiation is the process of trading concessions towards an acceptable outcome. The MVL is therefore the lowest “win” the tenant must achieve to remain on target. It allows a tenant to trade low-value concessions without compromising its business case.

In real terms, the value of an MVL is to give a tenant the confidence to walk away. Confidence is power. Knowing its minimum interests, a commercially minded tenant can play a bold hand. Sadly, most tenants negotiate with no compass, no way to track progress and no idea of the minimum acceptable standards.

Dark costs

15 May 2024

In building terms “latent” means something at the site that could not reasonably have been anticipated by builder at the time of quoting the job. Lease wise, a hidden condition means a clause in the lease whose operation is not immediately apparent but has the effect of increasing the effective cost to the tenant.

The ability to identify, anticipate and de-risk latent and hidden conditions is critical.

Design loops

13 May 2024

Landlords, particularly in shopping centres and retail precincts, may require a tenant to prepare and submit draft fitout plans for approval. The landlord charges the tenant to approve the plans. If the landlord rejects those plans, the tenant pays for new plans (and the cost of the landlord reviewing them) until they are satisfactory to the landlord. It can be a vicious and expensive cycle.

Value drivers

2 May 2024

Value drivers push the appraised value of a medical practice up.  The opposite of a value driver is a value detractor, which surprise surprise pushes the value down. The earnings multiple is arrived at by balancing the two.

The lease is a bellwether of practice value. It is full of potential value drivers and detractors.

It almost goes without saying, a medical startup needs to secure as many drivers as possible. Most cost nothing. They are there for the asking and up for grabs before the heads of agreement is signed. Miss enough drivers, the practice may well be unsellable.

Earnings multiple

30 April 2024

One informal approach to practice valuation is to multiply earnings.

The multiple to be applied to earnings depends on various risk/reward factors subjective to the practice. In simple terms, the practice scores or loses points for how easy and risky it is to run.

Multiples are drawn from experience rather than valuation theory and depend on the quality of data available on comparable transactions in comparable markets. They are applied as a rule of thumb and are not intended to be strictly accurate or reliable.

However, rules of thumb are handy because they demonstrate how healthcare operators can look to increase the value of their business by either increasing the earnings, the multiple or both.

Impairment

29 April 2024

An “impaired lease” is essentially a lease that is diminishing in value. As it approaches expiry, the value of the practice – of which the lease is an asset – falls as the lease slowly converts to a liability.

Impairment is a product of time decay and it happens a lot earlier than most expect. It is a numbers game all tenants play. Which is why exit planning is a key pre-lease negotiation filter. Play the long game.

Knowing the ropes

26 April 2024

The leasing process has been designed to shrink time-to-revenue for the landlord and its leasing team.  Checking the lease is a good fit for the tenant is not part of that process.

The sole determining factor of a good fit is whether the deal meets the tenant’s business case. 

Business cases for a dental practice lease, for example, are no more than half a page and can be arrived at through honest conversation.

At the idea stage, before any contact with a potential landlord is the ideal time to reach out for a chat. Because there, at the very beginning the war is won. 

Options

22 April 2024

Any discussion about the “length of lease” is more accurately about the maximum permissible lease term.

For example, a reference to a 20 year lease is to a 20 year maximum term (broken up into smaller option periods). So if the tenant chooses they can extend for up to 20 years. Not to be confused for a straight 20 year commitment.

The key is flexibility. Options to extend provide that flexibility. The length of lease and its options requires very slow, careful consideration.

Frogs and scorpions

15 April 2024

This fable perfectly illustrates the tension between risk and reason.

A scorpion wants to cross a river but cannot swim. It asks a frog to carry it across. The frog hesitates, afraid that the scorpion might sting it, but the scorpion promises not to, pointing out they would both drown if it stung the frog in the middle of the river.

The frog reluctantly agrees. Midway across the river, the scorpion stings the frog dooming them both. Dying, the frog asks the scorpion why it broke its promise to which the scorpion replies “I couldn’t resist. It’s my character.”

Fat triangle theory

14 April 2024

Think of the medical practice resale market as a big fat triangle. The higher the price, the smaller the market. 

Just as property developers build spec houses, practices can be designed to appeal to the maximum market possible in anticipation of a sale

If you are building a practice the best time to understand the market is before you sign the lease. Don’t know the best buyer type for your practice – slow down.

Winning

12 April 2024

Winners negotiate leases buyers want. Full stop.

Business case is king

9 April 2024

A business case is a balanced and well-reasoned statement outlining the why, what, where and how necessary to decide if it is worthwhile pursuing a lease of a particular site.

The lease is a whole-of-business bet. To its core, it must be fundamentally compatible with the business case. Rookies find a site and then build a business case for leasing it, not you. The business case comes first. Then the search begins. There is no other way. Diagnosis precedes prescription always.

Armed with a business case, your search becomes clearer and your positioning (power in the negotiation) skyrockets.

Power

7 April 2024

Power in a lease negotiation comes from deep understanding of process and positioning. The steps and how they relate to each other is the process. The person who is perceived as wanting it less than the other guy has the power – that is positioning.

Perceptions play a huge role. Medical practitioners are the most coveted tenant type. You are the prize. If landlords are not accommodating you, you have been outflanked.

Leasing systems are designed to commoditize tenant relationships and position the landlord as all powerful and indifferent. They are not.

Derail the application process. Do not play “their” game. You are the prize.

Your real market

6 April 2024

If you are investing hundreds of thousands of dollars building a healthcare practice, you are not in the health services market. You are in the healthcare practice resale market. 

Let that sink in. 

Under the bus

31 March 2024

Quality advice comes from a place of indifference, bordering on apathy, as to whether or not a deal proceeds. Assume the default position that salespeople will put the interests of the sale first, not yours. The agent works for the landlord, not you. A tenant can only meaningfully promote his interests by having a fully developed business case and advice from someone removed from the sales process.

The are some really good people in this space that would never prefer their interests to those of their client, and would not throw them under the bus for the sake of a fee. Find them.

Second opinions

27 March 2024

Have a sneaking suspicion the dollars are getting in the way of the truth ?

There are no surprises in leasing. It’s all there in black and white for you to see before you sign. But what if your people don’t know where or what to look for, or if it’s gone too far too fast and you are not sure how to handle the sales pressure ?

Get a second opinion from someone who is uninvolved in the deal and has no vested interest. Your sounding board needs to be able to explain to you what makes a good deal, or a bad one.

Not all leases are the same.

The best possible

21 March 2024

Getting the best “possible” lease may be the worst thing to do.

A well prepared tenant should be able to answer two basic questions. One. Will committing to this site, at this occupation cost on these terms meet the business case for investment ? Two. Will this lease support a sale of business unlocking an appropriate return on capital invested ? No. End of story. 

Pre-lease a tenant has incredible power. Don’t waste it.

Tick tock

11 March 2024

Over time, all leases become either an asset or liability to the tenant – and it is the tenant that chooses.

Success is not accidental. Magnified by time, small positive decisions made early in a deal compound to great benefit. Similarly, small compromises contrary to a tenant’s business case will fester. Time magnifies everything.

Surrendering

25 February 2024

If a tenant cannot articulate its business case before a lease negotiation, it has surrendered its advantage. 

Telltale signs of a non-existent business case include hearing things like “the agent is chasing me”, “I don’t want to lose this site” and the old chestnut – “I just want the best deal”. 

All that glitters

6 January 2024

On the journey to practice ownership, startups have a choice. Hold out for the right lease, or sign the one they are offered. Getting the “best deal possible” where the best outcome would be to walk away is no achievement.

Fast horses

11 December 2023

Henry Ford famously said, “If I had asked people what they wanted, they would have said faster horses.”

New tenants know what they want, but few know what they should want.

All projects start with a small, pilot engagement in which a needs analysis is completed. Based on those results tenants are taken through a mandatory exercise in which an optimal lease for their practice type (dental, GP etc) is modelled.

Once they see what that looks like, few stick with the horse they thought they wanted.